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Is GameStop Corp's New Strategy an Answer to its Problems?

GameStop (NYSE: GME) is under attack on multiple fronts. Sony (NYSE: SNE) and Microsoft (NASDAQ: MSFT) are encouraging a transition to digital sales, third-party publishers are attempting to sell downloadable content expansions and depress the used games market, and competing retailers like Wal-Mart now offer their own software and electronics trade-in programs.

The abundance of threats facing GameStop has led to skepticism about the company's future and valuation volatility. The last year has seen shares of the world's largest games retailer trade as high as $57.74 and as low as $33.10, with prices currently in the $41 range.

The company has already been making efforts to diversify its business and preserve its relevance, with an increasing focus on mobile hardware sales and software development. Now, GameStop is also looking to team up with publishers and to influence triple-A games early in the development process. One of the stated goals of this new strategy is to produce more content that is exclusive to the retailer. What does this mean for GameStop investors? Has the company engineered a fix to the challenges it faces?

An expansion of an existing strategyGameStop already partners with gaming publishers to offer exclusive content. In-game bonuses are frequently put forth as incentives to encourage pre-order sales through the retailer. As per a recent conversation with investor firm Baird, GameStop hopes to expand the quality and breadth of specialized content that it offers customers. The stated means of accomplishing this goal is earlier involvement in the development process, suggesting that the retailer will offer production funds, contribute to marketing resources, or give titles preferential focus at its outlets.

Source: GameStop.com

GameStop believes that influencing the early development phases will give it greater opportunities to offer appealing exclusive content. There's sound reasoning behind this position. The retailer's current exclusive offerings typically arrive in the form of supplemental characters, levels, or items. Granting its customers exclusive access to game modes and features more central to the gameplay experience should increase the likelihood that they will do business through the retailer's channels. Providing the right content could prove difficult, however.

Earlier and deeper involvement won't guarantee the desired resultsThe fundamental premise of GameStop's new content strategy is that publishers and developers will wall off significant portions of their products if given the right incentive. That puts game makers in the position of creating content that's good enough to meet GameStop's criteria but not so substantial as to fracture the player base or damage the appeal of the overall product.

The deals cut by the retailer will also have to be weighted so as to offset some of the benefits that publishers would have seen from concentrating on digital channels. GameStop's strategy may very well help in preserving its audience, but the retailer will need to devote considerable resources if this plan is to be effective. Even if the practice becomes highly successful, it could be replicated by competitors like Wal-Mart.

Sony and Microsoft are beefing up their online stores and platformsSecuring more enticing exclusive content will not be a cure-all for GameStop's problems. The retailer will still face increasing competition from Sony and Microsoft's respective online stores. In addition to gaming deals, the two console competitors are also strengthening their online platforms with other exclusive media content.

This week kicks off the Xbox Live Ultimate Games Sale, Microsoft's second big digital sale in under a year's time. While the Ultimate Games Sale is currently limited to Xbox 360 games, the company also offers a rotation of discounted Xbox One content through its "Deals with Gold" initiative on Xbox Live.

At the same time, Sony is offering discounts at multiple levels of its online platform. Users can find discounted software through the PlayStation Store, and they will also qualify for additional discounts if they are members of the PlayStation Plus subscription service. The company is currently running a promotion that sees many big titles from Japanese developers heavily discounted, some marked-down as much as 80%--with Plus subscribers able to snatch up titles at an even lower price. Sony's game streaming rental service, PlayStation Now, also poses a threat to GameStop.

GameStop seems intent on delaying the inevitableGameStop's plan to become more involved in the development of big games shows that the company acknowledges the pressures it's up against. The execution of the strategy will need to be spot-on if it's to have a meaningful effect, however. The retailer is swimming against too many industry currents, and it will eventually need to put forth more drastic changes to its model.

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[Edited original ticker from GAME to GME to properly reflect GameStop's correct ticker]

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